Will President-elect Donald Trump’s plan to implement tariffs cause stocks to fall? This is what history tells us.


In less than four weeks, President-elect Donald Trump will be sworn in as the 47th president and becoming the second US leader ever to serve non-consecutive terms. However, Wall Street decided to start the party a little early.

Since election day, the iconic Dow Jones Industrial Average (DJINDEXES: ^DJI)referent S&P 500 (SNPINDEX: ^GSPC)and depending on the growth stock Nasdaq Composite (NASDAQINDEX: ^IXIC) all have risen to record highs. This is a continuation of the robust gains that major Wall Street indexes enjoyed during Trump’s first term. Between January 20, 2017 and January 20, 2021, the Dow Jones, S&P 500, and Nasdaq Composite rose 57%, 70%, and 142%, respectively.

But to quote Wall Street’s favorite admonition: “Past performance is no guarantee of future results.”

While stocks thrived with Trump in the Oval Office, there is genuine concern that his desire to implement tariffs on day one could undermine American companies and send the stock market tumbling. From what history tells us, this is not out of the realm of possibility.

Donald Trump making remarks while standing behind the presidential podium.
Former President and President-elect Donald Trump delivers remarks. Image source: Official White House photo by Andrea Hanks.

Last month, President-elect Trump unveiled his plan to impose a 25% tariff on imports from its immediate neighbors Canada and Mexico, as well as a 35% tariff on goods imported from China, the second-largest economy worldwide

The overall purpose of tariffs is to make American-made products more price competitive than those brought in from outside our borders. They are also designed to encourage multinational companies to manufacture their products destined for the US within the confines of our borders.

But according to an analysis by Liberty Street Economics, which publishes research for the Federal Reserve Bank of New York, Trump’s tariffs have previously had a decisive negative impact on U.S. stocks exposed to countries targeted by those tariffs.

The four authors of Do import tariffs protect US businesses? distinguish between the impacts of tariffs on outputs and inputs. An exit fee is an added cost on top of the final price of a good, such as a car imported into the country. Meanwhile, an input tariff would affect the cost of production of a final good (eg higher costs of imported steel). The authors note that higher entry tariffs make it difficult for US manufacturers to compete on price with foreign firms.

The authors also examined the stock market returns of all US publicly traded companies on the day Trump announced the tariffs in 2018 and 2019. They found a clear negative change in stock prices on the days that the tariffs were announced, with this effect most pronounced on companies that were exposed to China.



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